The Penny Stock Trading System

214 Pages·2012·0.85 MB·English

Table of Contents
Preface --- --- P.2
Chapter 1 - What is a Penny Stock? --- --- P. 8

Chapter 2 - The OTC Market --- --- P. 11
Chapter 3 - The Pink Sheets --- --- P.19
Chapter 4 - Research Tools ---- P. 27
Chapter 5 - Financial Fundamentals --- --- P.55
Chapter 6 - Corporate Developments --- --- P.75
Chapter 7 - Turn Around Situations --- --- P.96
Chapter 8 - Special Situations --- --- P.107
Chapter 9 - Insiders --- --- P.116
Chapter 10 - Research --- --- P.129
Chapter 11 - Investor Relations Firms --- --- P.165
--- ---
Chapter 12 - Negative Situations P.180
Chapter 13 - Investment Strategies --- --- P.189
Conclusion – P.212
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Preface
This publication is designed to provide accurate and
authoritative information in regard to the subject
matter covered. It is sold with the understanding
that the author is not engaged in rendering legal,
accounting, financial, investment, or other
professional service. If legal advice or other expert
assistance is required, the services of a competent
professional person should be sought. The
information in this book is only for educational
purposes.
Welcome to the most comprehensive system on
penny stock trading. The goal of this book is to
supply the novice investor along with the
experienced professional equity trader with all the
information he or she will need to be educated in
the realm of penny stock trading. This book can be
used as an educational totem for those investors
who were always curious about trading in penny
stocks but did not know where to start. This book
will guide the investor by explaining the various
concepts and terms in an easy to understand
language. Besides its usage as an instructional book
for those who have never invested in a penny stock,
this book will also serve as a manual for the veteran
trader. As an investor you will be familiarized with
all the concepts behind micro cap investing. You
will learn what the difference between a reverse
merger and a reverse split is. You will be presented
with many new terms and concepts. Some of those
terms will be familiar since they are used in
connection with investing in the broader market
while other terms will be specific to penny stocks.
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In addition to the various terms and concepts you
will be able to benefit from another facet of this
book.
You will be able to personally benefit by using this
book as a manual on penny stock trading. This book
will teach you proven strategies that work when it
comes to penny stock investing. Instead of repeating
shallow, but nice sounding ideas, the concept of
buying low and sell high, you will be given
substantial strategies that are extremely effective
when done correctly. You will have at your disposal
strategies that only experienced traders know. The
strategies in this book have been collected from first
hand experience and from the collective experience
of numerous experienced penny stock investors.
We all know the frustration we encounter upon
spending a few weeks reading a book on investing
and then being left out to dry when we are dealing
with a real life situation. After finishing the book
we feel excited since we have just read 400 pages
telling us that the key to investing is following a
few simple ideas. All we will need to do is read the
daily business newspaper. The investment mass
media publications will have us believe that once
we have written down their simple ideas and have a
newspaper handy we will be on our way to making
our first million in the market. Unfortunately this
approach to investing is as far from the truth as
possible. How many times have we read a strategy
in an investment book only not to be able to apply it
in the real world of trading? The reason that we
often cannot apply the strategies we read in an
investment book is that most of the strategies we
see and hear on the evening news are based on
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theory and are not proven outside of the classroom.
Many theories only work in a perfect world where
the market always responds the way it is supposed
to respond to an event. Among the popular
misguided theories is to only look for companies
with solid earnings. But reality has shown us that
this theory does not hold its weight in the market.
How many times has a company released positive
earnings and still experienced a loss in its market
value? On the other hand how many stocks continue
escalating in value in light of the fact that they do
not have any earnings? If you knew that a company
was going to earn a billion dollars in six months
would you let yourself be preoccupied with the fact
that it is loosing money now? The simple fact is that
there are many other investing rules which are more
accurate than the frequently repeated advice we
hear thrown out every day by analysts and the
popular media. Next time you hear someone tell
you that “all you need to do is buy a stock and hold
it” ask him how long he plans on holding the next
horse and buggy company. The point is that once a
market for a product becomes eliminated then the
companies involved in that segment will either have
to change direction or will shortly be bankrupt.
Now you might be wondering if there is a method
altogether for investing or if you should just throw
darts at the financial pages and see on which stocks
the darts fall. Well, before you give up investing
and head for the black jack tables read on. There is
a method to the game. And the method consists of
many smaller steps which when followed properly
will lead on to successful investing. This book will
provide you with the broader method and the small
steps. If you follow the advice and stick to the
enclosed discipline you will learn allot and might
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even become substantially rich from your
investments.
Why penny stocks?
This book is focused on penny stocks. While there
are many different types of investing one can
partake of the author believes that micro cap
investing is the most rewarding one. Micro cap
investing has the potential to yield huge gains in a
short period of time. It is very common for penny
stocks to move upwards of 25% in any given day.
Keep in mind that the adverse means that they can
also move down 25% on any given day. The nature
of penny stocks makes them both very rewarding
and very dangerous. Then why invest in them at all?
Because in this world the more risk you take the
more reward you are posed to gain. If you put your
money in a bank account you will eliminate all risk
short of a total banking melt down. You will always
be able to access your money regardless of the
general condition of the market. A bank account
seems like the perfect type of investment vehicle
until you realize that the interest you earn hardly
keeps up with inflation after you have paid taxes.
You can then choose to increase your tolerance of
risk and invest in a bond with relative security and
safety. You will then have peace of mind but also a
very small return on your investment. If you decide
that you are willing to risk your money you can
enter the security arena via a mutual fund or the
purchase of a security like General Motors and hope
that by the end of the year your investment has
grown by 20%. You have increased your risk and
have increased your return potential at the same
time. By investing in an established mutual fund or
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company you have both minimized your risk and
potential at the same time.
But what if you wanted the opportunity to double or
triple your money in a month? You would be hard
pressed to find a stock trading on one of the larger
exchanges that had the potential to double in a
month. Now keep in mind that if a stock existed
which had the potential to double in a month it
would also have the potential to lose all of its value
in a month. But what if you decided that knowing
the huge risks you were about to undertake you still
wanted a crack at buying stocks that could double
your money in a month. You would find those
stocks among the ranks of the penny stocks. These
companies would be small companies with small
operations but large aspirations. These companies
would be driven by a dream and the necessary
ambition to beat the odds. The odds would be
stacked against them in many aspects. A majority of
these companies will never progress beyond the
development stage. But the slim percentage of
companies that do beat the odds can experience
dramatic growth in their stock prices of upwards of
10,000% in a year.
So is it worth investing in penny stocks? The
answer is yes and no. You will have to look within
yourself and discover if you have the ambition and
persistence to learn everything there is about penny
stocks. This book should prove to be more than
enough ammunition to beat the odds and discover
the right next penny stocks. But it is up to you to
decide if you have the courage and ability to take
the large risks associated with investing in them.
Use this book as an educational manual, and make
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sure to consult a broker before making your
decisions. This book is not meant to give advice, it
is only written for educational purposes. Read the
conclusion of the book before making any
investment decisions. It is located at the end of the
book. Good luck.
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Chapter 1
What is a Penny Stock?
Before we can enter the penny stock arena we have
to a clear grasp of what it is we are dealing with.
We need to have a definition of what a penny stock
is and where it trades. Without a basic definition of
the stocks we will be investing in we will make
countless mistakes out of confusion and lack of
direction. Like any entrepreneur, an investor must
know what the market they are entering is
comprised of. She must research it fully and know
all the details that pertain to the given business
segment she is entering. Before she commits one
dollar to her new pursuit she will make sure that she
knows everything there is to know about her market
cold. We will emulate the entrepreneur by learning
everything there is to know about penny stocks and
the market they trade in. In order to do so
successfully we will analyze the penny stock market
from the ground zero.
To start with we need to decide upon a definition of
what a penny stock is. Some investors mistakenly
assume that a penny stock is a stock that trades for a
cent. While there are many stocks that trade for a
cent and when traded correctly can yield vast
profits, the definition is broader. Some investors
consider any stock trading under $5 to be a penny
stocks. Those investors seek to avoid stocks they
deem to be highly risky. By labelling any stock
trading under $5 a penny stock they help separate
themselves from what they see as highly risky
securities. While both definitions are accurate four
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our intents and purposes we will define a penny
stock as any company trading on the over the
counter market. Our definition of a penny stock will
eliminate stocks trading under a dollar on the New
York Stock Exchange or stocks trading for .50 on
the Nasdaq Small Cap market. The reason we will
not consider those stocks to be penny stocks is
because more often than not a stock trading for
under a dollar on one of the larger exchanges will
soon be delisted due to dire troubles in its business.
A stock trading under a dollar on a major exchange
most likely once traded way above that price and
now due to either mismanagement or external
factors is in financial troubles and headed for
bankruptcy. While there is an art to investing in
those companies I have found that it is more
profitable to invest in companies that are still
awaiting their future than companies which have
already experienced what the future holds for them
and are now in decline.
The market cap is not relevant at this point. Later in
the book we will discuss how to use the market cap
when deciding on a stock. At this point our only
definition of a penny stock is a stock which trades
either on the over the counter market or on the pink
sheets. You must be wondering why I would ignore
the market cap when defining a penny stock. There
are many penny stocks with share prices in the
dollar range and a market cap of over a few hundred
million dollars, sometimes even equalling a mid cap
in the price of their market valuation. Clearly those
companies should not be considered penny stocks
any longer? If they are worth more money than an
established company trading on the Nasdaq then
they really are not penny stocks any longer?
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